By Nick Marshall
Since November 2021, the crypto market has lost more than $2 trillion in value and the outlook remains bleak. These are the conditions for a crypto winter, the term analysts use to describe a market that has not so much cooled as frozen. The good news for investors is that we’ve been here before and bounced back with renewed energy. For now, however, the priority is to navigate a portfolio through some dark, harsh months. Here’s how to survive a crypto winter.
What Is a Crypto Winter?
Crypto winters are marked by double-digit contractions in the market. Cool-headed investors would see these slumps as an inevitable price correction, but if you’re holding assets that have lost 30% or more against their all-time highs, there’s little to cheer about. The current crypto winter has been particularly brutal. Bitcoin plummeted to a price of $18,000 in June 2022, having stood at $68,990 in November 2021. Despite the freeze, a lot of investors got burned. A more worrying trend for those who study the crypto climate is that there have now been five winters since 2017 and three since 2021.
Understanding the Causes
While crypto volatility is certainly a contributing factor to the freeze, that doesn’t explain a market that plummets in unison and struggles to retain temperature for protracted periods. There isn’t a rush of investors waiting to “buy the dip” as there might be with conventional stock markets. Sentiment and emotion run higher in crypto, where there is no underlying asset to indicate value, and in the current winter the feeling towards cryptocurrencies remains ice cold.
Tracking the crypto climate:
- The 2017 crash was the result of a bubble bursting. There was a rush of new coins entering the market and many were destined to fail.
- Between 2018 and 2020, Bitcoin lost half its value. That winter was blamed on poor investor confidence due to the unregulated nature of crypto, as well as more initial coin offerings that lacked a serious concept behind them.
- Winter seemed a distant memory during the rampaging bull market from December 2020 to May 2022 — before the Federal Reserve interest rate hikes, the de-pegging of Terra Stablecoin from the dollar, and the collapse of several well-known players such as Three Arrows Capital (3AC) each contributed to the sudden onset of a record-breaking winter.
Is there ever a warning? As with currency markets and stocks, when banks and governments are pumping money into the economy, investors will speculate. But when a whirlwind of events such as those that occurred earlier this year strike, shrewd investors withdraw their assets into more secure holdings. We already knew that crypto was a speculative asset. We now know that it may not be the hedge against inflation we thought it would be.
What Happens During a Crypto Winter?
Whereas stock markets ebb and flow, there is no guarantee as to when crypto markets will bounce back. Stock markets move according to market forces, but crypto is driven primarily by confidence. As a newer asset class, it’s hard to know when investors will regain confidence and re-enter the market.
Likewise, although Fortune 500 companies are usually strong enough to emerge from a bear market intact, crypto winters tend to affect all currencies. There are fewer green shoots of recovery amidst the wasteland. In 2022, Bitcoin, Cardano and Ethereum all lost 60% or more of their value. The major exchanges were affected too, and Celsius paused withdrawals entirely.
A notable quirk of the 2022 winter is the impact of decentralized finance (DeFi). There is a much higher number of institutional investors saddled with a lot of undercollateralized lending. The current winter has exposed investors who are unable to meet margin calls, leaving the hand that feeds the market distinctly frostbitten.
Are There Any Winners in Winter?
There’s no shortage of diehard crypto disciples advising investors to hold on for dear life and wait for bear markets to become bulls again. That’s not so practical, however, if you were holding assets in Luna or Terra, which were once valued together at $60 billion and are now essentially worthless. If your holdings are in Bitcoin or Ethereum, on the other hand, or any established currency with a solid foundation, the freeze will eventually thaw. Bear markets typically flush out the weaker currencies, particularly those that rely on loans to survive or that lack an innovative growth plan.
If you have yet to make a first foray into crypto investing, now is the chance to fill up on coins such as Bitcoin that have reached astonishing highs in recent years, at a temptingly low price right now. Only a handful of cryptocurrencies deserve that kind of confidence, however, and it would be risky to back a startup or unknown entity at least until the thaw returns.
There’s no guarantee of crypto value, but you can secure your title. TransitNet offers the first offchain title registry for cryptocurrency. Before spring or summer returns, make use of this crypto winter to lock in proof of ownership for the season ahead.
Financial Express – Crypto Winter 2022: Everything You Need To Know
World Economic Forum – Cryptocurrency prices: What is a ‘crypto winter’?
Investopedia – What Is Crypto Winter?